September 2, 2024/InvestmentOne Report

Zenith bank released its audited financial report for the first half of the year, which showed a tremendous improvement in financial performance in the review period. In line with recent trend, interest income posted a significant increase of 176.68% YoY to settle at NGN1.15trn.

This underscores the favorable impact of the high yield environment emanating from the hike in the benchmark interest rate to 26.75% by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) in a bid to tame historically high inflation. Evidently, interest income from loans and advances (+140.35% YoY), bank placements (+228.54% YoY), Treasury bills (+269.18% YoY) and bonds (+220.74% YoY) all contributed to the substantial jump in interest income in H1’2024.

However, interest expense witnessed a 182.86% increase in in the period, amounting to NGN434.36bn also due to the elevated interest rate environment. Notably, the increase in interest expense occurred despite the expansion in the CASA mix (+86.35% in H1’2024 vs +82.37% in H1’2023) as the bank improved deposit from current accounts in its funding mix. Eventually, net interest income came in at NGN715.07bn, reflecting a 173.07% jump from the same period in 2023.

Trading Gains Drive Non-interest income:

Meanwhile, the banks’ earnings in the period were further amplified by the laudable performance seen in income outside the core business. In H1’2024, non-interest income totaled NGN951.94bn, 72.50% higher than what was recorded in the corresponding period of 2023 amidst the significant contribution from trading gains which has been a major income driver for the financial institution. Trading gains printed at NGN795.57bn, compared to the NGN103.03bn recorded in H1’2023 driven by gain on other trading books. We suspect that this could be traced to the bank’s effort to capitalize on interest rates volatility in the review period. Additionally, income from fee and commission also aided the rise in non-interest income through commission on letter of credit (+201.04% YoY), account maintenance fee (+55.95% YoY), foreign withdrawal charges (+150.41% YoY) amongst others. Essentially, gross earnings amounted to NGN2.10trn in H1’2024, 117.25% higher than what was recorded in H1’2023, reflective of the stellar financial performance in the first half of the year.

Higher Profitability Despite Cost Pressures:

We highlight that impairment charges weighed on profitability given the 99.73% YoY surge in impairment charges on both financial and non-financial instruments to NGN415.29bn. This was driven mainly by expected credit loss on loans and advances which constituted about 85% of total impairment charge at NGN352.11bn. Hence, NPL ratio settled at 4.50% (vs 4.40% in H1’2024). We opine that this may not be unconnected with the current macroeconomic challenges which could have possibly deterred customers’ ability to repay their loans in due course amid slowdown in business across specific sectors. Furthermore, operating expense (OPEX) saw a 115.30% YoY rise to NGN472.08bn stemming from higher personnel and other operating costs, mirroring the elevated inflationary pressures in the local economy.

Notwithstanding, the bank recorded commendable increase in profitability as pre-tax rose by 107.51% YoY to NGN727.03bn, while profit after tax amounted to NGN577.99bn (+98.12% YoY) in H1’2024. Consequently, ROE and ROA stood at 41.90% and 4.80%, compared to 36.90% and 4.10% respectively in H1’2023, reiterating the solid performance in the period. Moreso, EPS stood at NGN18.41 per share, significantly higher than NGN9.29 recorded in the first half of 2023. As such, the bank declared an interim dividend of NGN1.00 (dividend yield of 2.56%) as against the NGN0.50 (dividend yield of 1.35%) paid to shareholders in H1’2023.

Strong Financial Position:

The bank’s balance sheet remained solid, suggesting a strong financial position amid the expansion in total assets. Specifically, total assets expanded by 72.01% YoY to NGN27.58trn in H1’2024, on the back of the increase in cash (+63.37% YoY), the loan book (+83.96% YoY) and investment securities (+132.18% YoY). On the other hand, the 68.79% YoY expansion in customers’ deposits majorly boosted total liabilities to NGN24.38trn. Essentially, this implies a net asset value of NGN3.20trn, which is 79.24% higher than the same period in 2023.

Positive Outlook:

Going forward, our outlook is tilted towards a further increase in earnings driven by both interest and non-interest income. This is hinged on the high-interest rate environment which should positively influence interest income through elevated yields on investment securities. Furthermore, the expectation that the bank will continue to strategically grow its loan book also bodes well for higher interest income. Additionally, we expect non-interest income to also contribute to gross earnings through increased fee and commission income, as well as trading gains which has provided strong support for the bank’s earnings in recent times. Thus, we opine that the impressive performance in terms of profitability should persist through FY’2024 as the financial institution is likely to surpass the NGN1.00trn mark in profit after tax.

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